UK tax on terminal vacation pay?

By any chance, has anyone run into this one?  I didn't take my accrued vacation pay as a lump sum before leaving the States, but had it paid out over the first month I was physically in the UK. (Needed to do that for some weird internal insurance and pension reasons.)  Technically this pay was earned over the prior 3 years while in the USA. However, it was actually put in my bank account in the USA after I began living in the UK. So, I'm trying to sort out if that counts as having earned it during that first month here for HMRC purposes, or not? 

I will be interested in hearing the replies from the experts. I would have thought it was the date that the previously untaxed income was received that was important rather than when it was earned. If I received interest on savings or a dividend on stocks just after I arrived could I argue that it was only taxable in the US because it was earned before I arrived in the UK?

If this wasn’t a cross country thing then I’m sure it was when earned rather than when earned otherwise you could argue things like “I earned that money last year before the tax rates went up “

However I could be totally wrong. 

No clue, which is why I'm checking. Hope someone who has experience will offer advice.    Since it was technically a terminal payout that I could have taken before leaving, I thought that might have some bearing on it. Have been reading all through the tax stuff on HMRC website and basically running down one rabbit hole after another. And then there's all that "accrued" v "paid" stuff, that I think only actually applies to the IRS.  Bottom line:  if it's taxable, fine, I can live with that, but I just am trying to sort out how to plan.  Still waiting for a response from HMRC on some other questions, and I did ask them that as well, in a letter I sent a few months ago.  Assuming they do answer, I'll post the response.  

If it is taxable, I wonder how pension plan contributions and health insurance premiums that were deducted pre-tax in the USA would be treated in the UK? (And thank goodness it's only one month to sort out!)

One more. I kept running across language that said if some bit of income or other was not taxable in the USA that it would be treated the same in the UK. I think that dealt with pensions, primarily, but any idea if health insurance premiums paid for by employer/pension agency would be exempt from tax in the UK, or if I'll be paying tax on it as well? I've kept it to meet the CSI requirement, so dropping it is a moot point right now. Once the CSI requirement ends, I'll be discontinuing it if it's going to be taxed and buy a UK policy. Probably would do that even if it is not taxed, as the USA policy has a huge deductible and a 20% copay, so it's pretty much useless, although it also keeps me in compliance with the ACA regulations and the tax would be less than a local policy would cost.

I'm afraid I can't help you on the insurance payments as I've not been in that situation. I cancelled our health insurance through my ex-employer before we moved over and never had any payments with the insurance already deducted.

I have taken Roth IRA distributions since we've been back in England and they are tax free in both the US and UK.  Not everything that is tax free in one country is tax free in the other. For example interest from our ISA savings is tax free in the UK but not in the USA, and the US state pension (SS) is tax free in the US but fully taxed in the UK.

I would prefer to have our resident tax professional answer this, but until then, I'll offer my opinion. As usual, warning, I may be very wrong.

Income and benefits (vacation pay, etc.) earned from work performed in the US prior to arriving in the UK (for UK tax purposes) should not be taxable by HMRC no matter when the actual payment is made (even if after arriving in the UK for tax purposes). The caveat, for HMRC, is IF those funds earn income (interest, etc.) after one arrives in the UK and is taxed on the arising basis, and even if the funds remain in the US, that subsequent income (interest, etc.) is subject to taxation by HMRC.

Pension plan contributions and health insurance premiums that have been maintained and taxed in the US after one arrives in the UK (for tax purposes and arising basis) are of no concern to HMRC. HMRC will tax the individual on the gross income (prior to the deductions) in the UK and it is up to the individual to reclaim the offsetting tax credits via their US tax return for the applicable year.

If one has retained CSI in the US (and I have no idea what that is) to meet the ObamaCare mandate, then that is the individuals concern and of no interest to HMRC. Again, the full, gross amount of income is taxable by HMRC. The individual, resident in the UK, has the ability to avoid any ObamaCare mandate by filing IRS Form 8965. Not HMRC's problem.

If I read the Tax Cuts and Jobs Act correctly, the ObamaCare mandate will go away in 2019, so the need to file 8965 should disappear. Shame, it was by far the easiest form to complete.

We have BUPA coverage in the UK, related to past work prior to retirement. It is of no consideration on either our HMRC filings, or US filings. For the IRS/HMRC, it is the same as buying new socks. It's our choice of expenditure. If the BUPA were to be offered as a benefit to a UK employee of a UK company, the amount of the benefit would taxable as a "benefit in kind" by HMRC. A US return would tax the gross salary, including the benefit, and a tax credit would be used to offset US tax due via UK tax paid on the US return.

Again, I may be totally up the Swanee on this, especially since I don't know what CIS is.   

Thanks for trying, anyway. 

The pension plan contributions were 2-fold: a mandatory contribution percent of earnings and a voluntary one of one's choosing. Both were pre-tax in the USA; any tax would be levied on the payments out of the plans when the time came.  That's why I thought they might be excluded by the HMRC.

The health insurance (Comprehensive Sickness Insurance) is pre-tax in the USA. The employer wraps it into the employment compensation.  It was mandatory when I was working - to meet the ACA and per the specs of my employer. They automatically covered employees under the same catastrophic medical insurance program unless one chose to "buy up" into one of the better plans they offered by paying a premium (pre-tax) every month. You couldn't opt out of their medical plan coverage unless you could prove you had other insurance outside the workplace. Outside insurance would have cost me in the realm of $900 -$1,100 a month, so, nada on that point!   

My keeping the coverage is voluntary for me now, as a pensioner. I pay nothing for it, and although it's not a very good plan it meets the CSI requirements of an EU citizen living in the UK, as required. There's been talk that they're not going to require the CSI as Brexit progresses, but until I see that finalized I'm not dropping coverage. I chalk it up as an "opportunity cost."

Until I've been out of the USA for a year I think I have to keep the insurance, and could then drop it without running afoul of ACA. And even then, when I turn 65 I have to file for Medicare coverage or face a stiff penalty if I ever go back to the USA. With Brexit convulsions as they are, there's no telling if I'll have to go back or not - and the insurance provided by the pension program would convert to cover my Medicare premium costs when the time comes. So, there is some sense in keeping it, even though I'd be taxed on it over here. The tax would be way less than the penalties I'd have to pay the USA for Medicare if I ever go back.

I wrote to HMRC in October, so hopefully I'll hear from them soon as to how to treat the accrued vacation pay. If memory serves, the last time I sent in a request for info it took about 3 months, so it should be soon.

OK, got my response from HMRC:   The vacation pay received while in the UK is taxable in both places, but since it was for work that would have been done in the USA, the HMRC is allowing a tax credit for what I paid the IRS against HMRC taxes for that month. (That'll be fun to sort out!) 

My 403B disbursements are, of course, taxable here, but will be re-sourced to the UK for USA tax credits.

HMRC is saying that I have to ask the IRS if the IRS considers my pension to be a government pension ala Article 19; and, if so, if paragraph 2 or paragraph 3 applies. If the IRS thinks it is, and if paragraph 2 applies, then it will not be taxable in the UK. So now I've written to the IRS to ask that. (That one was a surprise.)

Assuming that response from the IRS comes back as a negative: looking at the tax treaty I see

ARTICLE 17
Pensions, Social Security, Annuities, Alimony, and Child Support
1.a)  Pensions and other similar remuneration beneficially owned by a resident of a
Contracting State shall be taxable only in that State.
b)  Notwithstanding sub-paragraph a) of this paragraph, the amount of any such
pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first-mentioned State.

So, does that mean that if my pension is deemed "non-governmental" for tax treaty purposes, it is taxable ONLY in the UK?

https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/uktreaty.pdf

Nan - I do not agree with the view on vacation pay. I cannot see how that fits to UK statute. I would ask again with a request for a statutory reference along with a discussion of any relevant case law.

Government service is well discussed in HMRC manuals; albeit that these have no statutory authority.  Are a you a British citizen? The IRS will not reply though; so I am not sure why you'd want to write to them. 

Thanks for the update Nan, hang on in there and keep hammering away 

What company or organization did you work for that provides the pension? As guya says I doubt the IRS will come back with a definition.  I think that if you worked for a school or other State organization that it would be considered a government pension and taxable only in the USA. (In other words I don't believe "government pension" is limited to Federal Government)

Nan - I do not agree with the view on vacation pay. I cannot see how that fits to UK statute. I would ask again with a request for a statutory reference along with a discussion of any relevant case law.

Government service is well discussed in HMRC manuals; albeit that these have no statutory authority.  Are a you a British citizen? The IRS will not reply though; so I am not sure why you'd want to write to them.

Well, it's what they said!  What do you think their response should have been?  No tax on it? (I have edited my original message.)  No, I am not a British Citizen.

When I spoke to HMRC by chat this week they told me to basically disregard that month, because it was only one month. Which sounds really, really wrong....

Thanks for the update Nan, hang on in there and keep hammering away 

What company or organization did you work for that provides the pension? As guya says I doubt the IRS will come back with a definition.  I think that if you worked for a school or other State organization that it would be considered a government pension and taxable only in the USA. (In other words I don't believe "government pension" is limited to Federal Government)

That's kind of how I see it, but...  it was a major public research uni, and  “a governmental defined benefit pension plan qualified under §401(a) of the United States Internal Revenue Code (IRC).”

I know there are individuals on this board who have had similar designations ruled by HMRC as NOT being government pensions,  but also someone who has had theirs considered by HMRC as a government pension, so I want to nail them down on it.

Nan - have you looked at HMRC Manuals? These are extremely clear on HMRCs view of how to define a government (and non-government) pension.

Hi Guya -  I just got off the phone with the IRS, and they pointed me to Pub 901 p.33 that seems to indicate it's a governmental pension. She said the only way to get a letter from the IRS was to use a procedure where they send the inquiry to a special counsel, which would cost me more than all the tax to be paid to either country. So I may send a response to HMRC with a print-out of IRS tax Pub 901 with p. 33 bookmarked. Reading HMRC next, so that hopefully that won't be needed.

[edit - Nope, that didn't help.]

UK residents with foreign income or gains: income arising abroad: Definition of government remuneration

It may be accepted that the earnings or pension of an individual who is, or was, directly employed in central, regional or local government service is paid to him by the other state for services rendered to that state. Members of armed forces or teachers employed by a local authority (or by the board of governors of a public sector school) are also regarded as paid by the state for services rendered to that state. A pension paid by a government etc to the widow or dependants of an individual who rendered services to that government etc is similarly regarded as being paid to the pensioner by the other state for services rendered to that state.

Employment with a statutory body set up by a state etc. is not usually regarded as involving payment by, or the rendering of services to, that state etc., even if the body is set up and funded by the state etc. Employees in nationalised industries are also not regarded as coming within the government services Article, nor are employees of privatised industries.

So, the Regents of the University System control the pension plan and I was employed by them. They consist primarily of state government officials and some representative faculty. Are they  "the board of governors of a public sector school" or are they "a statutory body set up by a state"?

I'm thinking it's probably the latter:

The Regents of the University  is the governing board of the University system.[3] The board has 26 voting members. The [state] Constitution grants broad institutional autonomy, with limited exceptions, to the Regents.[4] According to article IX, section 9, "The University shall be entirely independent of all political or sectarian influence and kept free therefrom in the appointment of its regents and in the administration of its affairs." As with almost all other public university systems nationwide, the board of regents is treated as the real party in interest for all purposes under [state] law.[5][6] Legally speaking, the Regents are a [state] corporation,[7] administering the university as a public trust under the [state] Constitution. All actions of the university are done in their name, all degrees are conferred in their name, all  property is held in their name (and is marked by signs indicating "Property of the Regents of the University "), all bank accounts are held in their name, and all lawsuits involving the University always refer specifically to the regents. This is notable because most corporations (especially private ones) are treated by the law as a legal entity separate from their boards and employees, and lawsuits against them are addressed to the corporation or university itself, not its board of directors or trustees.


But they definitely are the Board of Governors of a Public Sector School. SO which definition flies here?

Was worth a try. Will write to HMRC again and see what comes back down the pipeline this time, for the pension.

Silly question time. Why does it matter? You report the income to the IRS and resource it as foreign if it is UK taxed. UK tax rates are not that much different from US rates.

Close, but I would definitely save some cash if it's USA-only taxable for this year.